OECD delivers international standard for collection of VAT on cross-border sales

06/11/2015 - Governments have taken an important step towards ensuring that consumption taxes on cross-border transactions are effectively paid in the jurisdiction where products are consumed, while minimizing the risks that uncoordinated tax rules distort international trade.

The decision by representatives of more than 100 countries and jurisdictions to endorse the new OECD International VAT/GST Guidelines as the preferred international standard for coherent and efficient application of Value Added Tax/Goods and Services Tax to the international trade in services was one of the highlights of the annual meeting of the OECD Global Forum on VAT on 5-6 November, in Paris, France. See Statement of Outcomes here.

This final package of OECD International VAT/GST Guidelines includes recommended rules for the collection of VAT on cross-border services, including Internet downloads, to private consumers (Business to Consumer, or B2C Guidelines). The Guidelines recommend that foreign sellers register and remit tax on sales of e-books, apps, music, videos and other digital goods in the jurisdiction where the final consumer is located. The Guidelines also include a recommended mechanism to ensure the effective collection of VAT by tax authorities from foreign sellers, thus helping governments to protect VAT revenues and levelling the playing field between domestic and foreign suppliers.

“The effective and consistent implementation of the recommended approaches for collecting the VAT on these digital sales will help jurisdictions to protect their VAT revenues and level the playing field between domestic and foreign suppliers”, said the OECD’s Deputy Secretary-General Rintaro Tamaki. “It is very encouraging to see that a number of jurisdictions have already implemented the rules and the mechanism recommended by these Guidelines, or have expressed their intention to do so. They expect that these reforms will contribute considerable revenues to government budgets”.

The decision to draft new OECD Guidelines on VAT responds to growing concern from governments worldwide over the ever-rising volume of cross-border services and online downloads on which no VAT is paid, particularly on products bought by private consumers from e-vendors outside their home jurisdiction. In 2014, B2C e-commerce sales were estimated to exceed USD 1.4 trillion, an increase of nearly 20% from 2013. B2C sales are estimated to reach USD 2.4 trillion by 2018.

OECD and G20 governments identified this VAT gap as a key challenge in the context of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project, which sought over the past two years to design a comprehensive, coherent and co-ordinated reform of international tax rules. The BEPS Project – endorsed by G20 finance ministers on 8 October, and awaiting discussion by G20 leaders during a head of state summit on 15-16 November in Antalya, Turkey – offers governments solutions for closing gaps in existing tax rules that allow corporate profits to “disappear” or be artificially shifted to low/no-tax jurisdictions.

In this context, the new B2C Guidelines were added to the OECD International VAT/GST Guidelines, and included in the final BEPS package.

The OECD International VAT/GST Guidelines set standards on VAT-neutrality and on destination-based taxation of cross-border sales of services to businesses (B2B) and final consumers (B2C). Together, these standards should ensure that VAT targets private consumption and not businesses, and that sales are taxed effectively in the country of consumption. The final package also includes guidance to support the consistent application of the recommendations of the Guidelines by tax authorities.

Global Forum participants urged the OECD and G20 to continue work, notably on the development of implementation packages to support consistent implementation of these Guidelines, and to design an even more inclusive framework to support and carry out this work with the involvement of all interested countries and jurisdictions, particularly developing economies, on an equal footing.

For further information on the new OECD International VAT/GST Guidelines, or the OECD/G20 BEPS Project, go to: www.oecd.org/tax.